COMPANY NEWS

COMPANY NEWS; Bottom Fishing With R.D. Smith

By ALISON LEIGH COWAN

Published: March 29, 1991

In the wreckage left behind by failed corporate buyouts and mergers, a young Wall Street firm is defining and dominating a niche as a one-stop shop for investors interested in the securities of troubled companies.

R. D. Smith & Company, whose office near Wall Street fittingly overlooks the Trinity Church graveyard, is profiting from other people's misery by trading the stock and debt of troubled companies, both for itself and its customers. Its researchers, who zero in on companies now abandoned by Wall Street's giants, are credited with correctly sizing up the stock and debt issues of many bankrupt and near-bankrupt companies. Complaints From Clients

While Smith draws raves for its savvy research, it has also received complaints from some of its investment partners and customers. The complaints spread over a range of instances, but the one central theme seems to be that Smith and its web of affiliates are out, first and foremost, for themselves.

"Something you know with Randy Smith is that they're also investors," said Hubert J. Stiles, the president of T. Rowe Price Recovery Fund Associates, which is a Smith customer. "So you just have to be careful that it isn't something where it's a conflict of interest."

The biggest gripe is that Smith will needlessly play a game of chicken with a hard-pressed company by being a holdout in a debt restructuring. Its aim, of course, is to wrangle the sweetest deal. There is nothing illegal about this. In fact it is done all the time. But it raises the hackles of other investors. The Community Newspapers Deal

For example, in the case of one restructuring last month, a client said that a Smith official had told him to buy the bonds of Community Newspapers at 65 cents on the dollar and exchange them for the 74 cents the company had offered.

The customer, who insisted on anonymity, said he followed Smith's advice, only to discover that Smith was quietly holding out for more money for itself. Smith was hoping to squeeze out more than the 74 cents the company was offering by refusing to exchange the bonds it held.

When not enough debtholders accepted the company's offer, the debt restructuring collapsed. As a result, the company was forced into bankruptcy court, and debtholders -- including the Smith client -- may now receive less than the company had offered.

"They can be a good partner, and they can be a thorn in the side of people trying to do responsible things," said Mikael Salovaara, a Goldman, Sachs & Company partner who supported the effort to save Community Newspapers. "It was responsible business to keep this thing out of Chapter 11," he added.

Michael C. Singer, Smith's president, defended the firm's actions and said it had recommended the bonds on the theory that they would be valuable whether or not the tender offer succeeded.

There are also concerns that Smith officials wind up on creditor committees in bankrutpcy cases and use information circulated in those groups to their own advantage.

Senator Donald W. Riegle Jr., the Michigan Democrat who is chairman of the Senate Banking Committee, sent the first of two letters calling on the Securities and Exchange Commission to start an investigation after reading an article in Forbes magazine in January. The article indicated Smith and other bankruptcy specialists might be using inside information, gleaned from their work on various creditor committees, to profit on trading positions.

The S.E.C,, which has yet to respond to Mr. Riegle's letters, declined to comment on the request. Avoiding Potential Conflicts

To avoid future potential conflicts of interest, Mr. Singer said it was now Smith's practice not to participate on creditors' committees in large bankruptcy cases. "We'd rather not be restricted," he said. "We'd rather trade the bonds."

Concerns like these make some investors hesitant to deal with Smith. "It's true some people will think twice about doing business with R. D. Smith because of what they think they know about them," said Kenneth Urbaszewski, a senior vice president of the Kemper Group's Financial Services unit, whose company does a modest amount of business with Smith.

Smith officials generally brush away the complaints and attribute them to jealous rivals in many cases. "One of the disadvantages of being a leader in a field is you get sniped at," Mr. Singer said.

Randall D. Smith Jr., the founder of the firm, declined to be interviewed for this article. He is a man who rarely speaks to reporters or allows himself to be photographed.

Smith's success owes much to the stream of failed corporate buyouts. Too many companies took on too much debt and are struggling to avoid bankruptcy. Edward I. Altman, a finance professor at New York University, said that by one measure there is $318 billion worth of marked-down debt that has either defaulted or yields 10 percentage points or more than comparable Government securities.

The market, where all that marked-down "merchandise" trades, is by any definition an inefficient and underregulated backwater of the securities business. Information is scarce, securities practically trade by appointment, and brokers charge as much as 2 percent of the trade for lining up the buyer and seller, or for keeping a risky, illiquid security in inventory. Outstanding Research